A Five Forces analysis of Facebook Inc. reveals issues that affect the company’s position as one of the top players in the international social media market. Michael Porter developed the Five Forces Analysis model to evaluate the external factors that influence companies’ industry environment. In this business analysis case, such external factors influence the level of competitive rivalry that firms like Facebook experience in the global social networking market and the online advertising industry environment. As one of the biggest competitors in the multinational industry, the company enjoys the benefits of high revenues and popularity among users and advertisers. This position helps ensure the fulfillment of Facebook’s vision and mission statements. However, to keep this market position, the company must counteract the negative effects of external factors shown in this Five Forces analysis of the business and the online display advertising industry environment.
This Porter’s Five Forces analysis of Facebook Inc. puts emphasis on customers and substitutes as the strongest forces based on external factors in the social media business. Nonetheless, all external factors in the Internet advertising industry environment are significant in affecting the company’s business performance relative to the performance of competitors like Google LLC, Twitter Inc., and Snap Inc. (Snapchat).
Overview: Five Forces Analysis of Facebook Inc.
Facebook’s market position as one of the world’s leading online social media businesses provides a variety of benefits. However, this Five Forces analysis shows that the company must keep satisfying customers to reduce the potential negative effects of competition and substitution against its social networking website, mobile apps, and related offerings. The following are the strengths or intensities of the Five Forces that influence Facebook Inc.’s business:
- Competitive rivalry or competition (moderate force)
- Bargaining power of buyers or customers (strong force)
- Bargaining power of suppliers (weak force)
- Threat of substitutes or substitution (strong force)
- Threat of new entrants or new entry (weak force)
Recommendations. Based on this Five Forces analysis (Porter’s model), Facebook Inc. retains its industry position partly due to new entrants’ and suppliers’ weaknesses. Such weaknesses impose minimal barriers to the social media company. However, customers significantly influence the business in terms of their ability to transfer to other companies that offer social media services (for members/users) and online advertising services (for advertisers). In relation, substitutes have the potential to eat away from the firm’s market share. Thus, the external factors in this Five Forces analysis highlight the need for strategies and management approaches that continually satisfy customers of Facebook’s social networking website and mobile apps. This recommendation can help retain clients and market share. In addition, it is recommended that the company implement strategies that keep its display advertising services more attractive than those of substitutes. This move should minimize the negative influence of substitution in the industry environment. Also, improvements in Facebook’s operations management strategy can enhance business efficiency in addressing competitive challenges.
Competitive Rivalry or Competition with Facebook Inc. (Moderate Force)
Even with its leading social media market position, Facebook Inc. experiences the significant impact of competition. This element of Porter’s Five Forces Analysis model determines how competitors affect the company’s industry environment. The following external factors lead to the moderate force of competitive rivalry against the company:
- Small number of firms (weak force)
- Moderate variety of firms (moderate force)
- Low switching costs (strong force)
There are only a small number of companies that offer online display advertising services similar to that of Facebook Inc. For example, YouTube LLC (a subsidiary of Google LLC) has a social media website that offers targeted online advertising service. In the context of this Five Forces analysis, the small number of competing firms exerts a weak force against Facebook. However, the variety of these firms helps attract advertisers, thereby imposing a moderate force in the industry environment. In addition, the low switching costs (low difficulty of transferring from one provider to another) make it easier for advertisers to shift away from the company toward competitors. These external factors create the moderate force of competition. Based on this element of the Five Forces analysis, competitive rivalry is a major consideration in Facebook Inc.’s management and strategic formulation.
Bargaining Power of Facebook’s Customers/Buyers (Strong Force)
Customers impose pressure on Facebook Inc. in terms of what they want from the company. The impact of consumers or buyers on the online display advertising industry environment is examined in this element of Porter’s Five Forces Analysis model. The following external factors lead to the strong force of customers’ bargaining power on the company’s social network and related services:
- High substitute availability (strong force)
- Low switching costs (strong force)
- High demand from buyers (weak force)
Facebook provides social media services to its members/users. However, advertisers are the company’s primary source of revenues. These advertisers have the option to use substitutes, which are highly available. For example, instead of advertising on Facebook, customers could advertise on television, radio and print media, all of which are widely available and effective in reaching target audiences. In this Five Forces analysis, such a condition exerts a strong force against the business, despite the social network’s strong popularity (see SWOT analysis of Facebook Inc.). In addition, low switching costs are an external factor that makes it easy for customers to shift away from the company’s social networking website, mobile apps, and advertising services. This factor exerts a strong force against the business. The high demand for online advertising buffers the potential shift of advertisers and slightly weakens the bargaining power of customers. This element of the Five Forces analysis shows that Facebook Inc. must prioritize its customers to ensure competitive advantage.
Bargaining Power of Facebook’s Suppliers (Weak Force)
Suppliers are among the factors that influence Facebook Inc.’s social network and display advertising services. This element of the Five Forces analysis shows how suppliers affect firms and the industry environment. The following external factors lead to the weak bargaining power of suppliers on Facebook Inc.:
- Moderate size of individual suppliers (moderate force)
- Large population of suppliers (weak force)
- High overall supply (weak force)
Examples of Facebook’s supply needs include servers and related computing and network technology/equipment, as well as office supplies. Some suppliers are large firms that exert a moderate force on the company. However, these supplies are available from many manufacturers. In this Five Forces analysis, the large supplier population is an external factor that exerts a weak force on Facebook Inc. In relation, the high overall supply minimizes the influence of individual suppliers on the company. Based on these external factors in the Five Forces analysis, suppliers are a minimal issue in the firm’s social media and online advertising industry environment. However, the company can improve its management of supplier relationships through suitable strategies for the supply chain. These strategies can contribute to Facebook’s corporate social responsibility fulfillment involving suppliers, among other stakeholders.
Threat of Substitutes or Substitution (Strong Force)
Substitutes could potentially reduce Facebook’s business performance and create challenges in the social media firm’s industry environment. The impact of substitution is considered in this element of the Five Forces analysis. The most notable external factors that create the strong threat of substitutes against Facebook Inc. are as follows:
- Low switching costs (strong force)
- High substitute availability (strong force)
- Moderate cost of substitutes (moderate force)
It is easy for advertisers to pay for substitutes, such as television, radio and print advertising, instead of paying for Facebook’s social media advertising. In the Porter’s Five Forces Analysis framework, this condition exerts a strong force on the company. In relation, the high availability of such substitutes strongly affects the industry environment. Nonetheless, many of these substitutes, especially television advertising, are more expensive than Facebook’s advertising services. Such cost condition exerts a moderate force on the company. This element of the Five Forces analysis shows that the threat of substitution is one of the major issues facing strategic management at Facebook Inc.
Threat of New Entrants or New Entry against Facebook Inc. (Weak Force)
The social media giant faces the negative effects of new entrants in the industry environment. This element of the Five Forces analysis covers the impact of new firms on the business. In this external analysis case of Facebook Inc. and its social network and related products, the following external factors lead to the weak threat of new entry:
- Low switching costs (strong force)
- High cost of brand development (weak force)
- High cost of customer loyalty (weak force)
New entrants exert a strong force against Facebook, due to the low switching costs (low difficulty) of advertisers in moving from one service provider to another. However, this Five Forces analysis also shows that it is difficult to develop a popular and reliable social media brand similar to Facebook’s. It is also difficult to build the loyalty of advertisers and users/members. This external factor weakens the threat of new entry against the company. Based on this element of the Five Forces analysis, new entrants are a minimal issue in Facebook’s strategic formulation processes.
References
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- Facebook Inc. – Company Info.
- Facebook Inc. – Form 10-K.
- Grundy, T. (2006). Rethinking and reinventing Michael Porter’s five forces model. Strategic Change, 15(5), 213-229.
- Roy, D. (2011). Strategic Foresight and Porter’s Five Forces. GRIN Verlag.